Can a California real property owner challenge a lender’s authority to foreclose before a foreclosure sale has occurred? It’s looking less likely with each new appellate opinion.
The California Supreme Court has not directly answered the question.
In the landmark opinion Yvanova v. New Century Mortgage Corporation, the California Supreme Court held that borrowers have standing to allege wrongful foreclosure after a completed foreclosure sale based on a void (not merely voidable) assignment of the underlying promissory note and deed of trust. The opinion was expressly limited to post-foreclosure actions for wrongful foreclosure.
Money and Dirt covered the Yvanova opinion here: California Supreme Court: Borrowers Have Standing to Allege Wrongful Foreclosure Based on Void Assignment of Note.
Both before and after the Yvanova opinion, most California Courts of Appeal seem to hold that a property owner cannot challenge a lender’s ability to foreclose before a foreclosure sale has occurred.
For example, in Saterbak v. JPMorgan Chase Bank, the Court of Appeal limited the applicability of Yvanova to only claims based on a completed foreclosure sale (not a threatened sale). The court held: “California courts do not allow such preemptive suits because they would result in the impermissible interjection of the courts into a nonjudicial scheme enacted by the California Legislature.”
Saterbak was covered on Money and Dirt here: Court of Appeal Rules on “Standing to Challenge Foreclosure” Issues Left Unaddressed by Yvanova.
But not all Courts of Appeal have agreed with that approach.
In Brown v. Deutsche Bank National Trust Co., the court acknowledged some decisions — like Saterbak — holding that borrowers cannot bring “preemptive” attacks on the assignment of a deed of trust before a foreclosure sale. But, the court observed, the reasoning in Yvanova “raises the distinct possibility that our state Supreme Court would conclude that borrowers have a sufficient injury, even if less severe, to confer standing to bring similar allegations before the sale.”
Ultimately, the court held that it did not need to decide that issue, because the appeal could be resolved on other grounds.
The Brown opinion was covered on Money and Dirt here: The Simplest Way to Defeat Claims Alleging an Invalid Assignment of a Deed of Trust: Judicially Noticeable Documents.
The Ninth Circuit Weighs In: Perez v. Mers
In the Perez case, plaintiffs sued for declaratory relief and to cancel deeds of trust on two properties they owned. The claims were based on alleged defects in the assignments of the underlying deeds of trust.
One property had been the subject of a notice of default and notice of sale, but no sale had occurred. As to the second property, there were no allegations that any foreclosure proceedings had been initiated, and the record indicated that the owners were not in default on their loan.
The Ninth Circuit is part of the federal court system. When interpreting California law, federal courts are bound by the decisions of the California Supreme Court. But where there are no such decisions by the Supreme Court, the federal court will generally follow the state’s intermediate appellate court holdings.
After surveying relevant opinions of California’s Courts of Appeal, including Saterbak, Brown, and others, the Ninth Circuit sided with the reasoning in Saterbak. The court held that “California law does not permit preemptive actions to challenge a party’s authority to pursue foreclosure before a foreclosure has taken place.”
Unless and until the California Supreme Court holds otherwise, a property owner likely cannot preemptively challenge a lender’s authority to foreclose before a foreclosure sale occurs.